Methods Of Reward Distribution In Crypto Mining Pools

What does pool mining give an ordinary user?

Why is mining important for cryptocurrency?

Mining is one of the most important processes in the world of cryptocurrencies, no matter if a user mines solo or takes part in crypto mining pools. Each participant of this process, a so-called miner, is constantly calculating the value of a new block's hash. If that value meets required criteria, the block is added to blockchain. In this case, all transactions inside the block are considered as valid, the asset transfer is performed, and a miner receives a reward. This reward consists of two parts: a block reward and a transaction fee.

Every miner wants to be the first to close a new block and receive a reward. This pushes miners to increase their calculating performance. From the very beginning, participants mined with CPU. But then, they switched to GPU mining, special FPGA cards and ASIC micro schemes. The performance increase was possible due to the construction of so-called mining farms where super fast and powerful computing devices were united in a single computing network.

Pooling of efforts

The described mining approaches used to bring reward to a single owner. Evidently, users with low-performance hardware almost had no chances. On the other hand, bitcoin price had increased so much that it became possible to divide a single coin among several participants. That is the reason why miners started joining crypto mining pools. Together they can mine and distribute a reward among all participants.

It is simple enough to participate both in an old or a new mining pool. Just find an official website on the Internet, get acquainted with the rules, download a synchronization program and follow instructions to attach to the pool. Such preparations are required for various reasons. Some may dislike given mining conditions, others may be concerned about behavior rules. And, of course, there are people who may get confused with the scheme of reward distribution. Let’s discuss this issue in more detail.

A reward per block in a crypto mining pool

People focused on profit are mainly interested in the reward distribution process among participants. Taking into account thousands of participants, this issue is really important. First, we should also note that the block reward might be accounted separately of a transaction fee. Different pools deal with fees in different ways. Second, a pool owner may seize a certain part of the reward as coordination expenses.

The payout system is based on such concepts as “share” and “round”. A single round is the time interval between correct blocks found by pool participants for main blockchain. A single share is a block that is valid only for the recently started version of blockchain. The main idea is that the block difficulty is constantly changing. According to the rules, an average block time interval in the main chain should always be 10 minutes. Since the beginning of mining, the difficulty has increased many times. Not all shares are valid for the main blockchain, but this approach is good enough to measure the work of the pool participants.

Tips for choosing a crypto mining pool

If you are a beginning miner, the selection of a crypto mining pool may become a huge problem. The question of mining pools comparison is rather difficult. It is highly recommended to get more information about pools you are going to work with. This section can be your guide.

Once you get deeper into details, try to find a mining pools' profitability comparison paper that includes a mining pool chart for several months. This will help you to prevent unwanted losses. For more experienced users, it would be nice to check for mining pool hub setup.

Simple ways of reward distribution

Proportional method

This approach assumes that participants constantly input their computing performance proving this by proposed shares. Payment is executed every time the pool mines the block. After the block is closed, the pool owners take their part of funds, while the rest part is divided among participants in accordance with the number of received shares.

Proportional pool mining method

This approach has a huge disadvantage. A participant may join and leave the pool in certain moments to maximize the profit. This strategy has given birth to the pool hopping tactic. Users tried to hop from one pool to another in order to get a greater reward with fewer efforts.

Pool hopping strategy

The calculations show that it would be optimal to join a pool for a certain time and then change it. This strategy seems quite logical, because every additional share costs less in time, while the block reward remains unchanged. In the worst case, this behavior deprecates casual miners' work by 43%.

Reward decrease as shares are mined

This is a simple and old payment method, and new mining pools rarely use it.

Pay-per-Share (PPS) method

In the PPS system miners receive their part of the block reward every time they present the share as a performance proof. This depends on the participant’s hash power and has nothing to do with the block closing time. Within this approach, it is impossible to predict a transaction fee. A coordinator doesn’t take the fee into consideration.

There are several reasons why the PPS method is profitable for honest miners:

A reward is received regardless of block closing.

It is easy to understand when and what assets were received.

The honesty of the pool owner is proved.

Pool hoppers are discouraged.

On the other hand, this method is expensive for the pool operator. When receiving a reward in short rounds when the block time is small, the operator may suffer losses during long rounds when a new block is not yet found but the pool has to pay a reward to miners.

Immediate payment per share

According to the mining pool profitability comparison, this approach is perfect for stable miners and experienced central coordinators that are aware of risk management and have enough funds to start the whole process.

Slush pool method

This method is sometimes referred as Bitcoin Pooled Mining (BPM). Its authors took a proportional approach as a basis and modified it a bit. Each share has a certain points number assigned to the calculated payment value. Payments are not based on shares but on the sum of points corresponding to the shares. The points depend on the time that has passed since the round was started. The more time has passed, the higher the price of each share. Besides, the aging function holds non-linearity presented as the power over the exponential function. By varying coefficients inside of the formula, the different aging rate of points can be reached.

This system initially was developed to fight pool-hopping. It gave a strong impetus to the evolution of various pool reward distribution methods. Nevertheless, this approach has significant flaws:

There is no long history of shares mining at the beginning of the round. Aging doesn’t work at full capacity. Thus, mining still remains more profitable.

Changing the pool's hash power can influence the effectiveness of the fight against hopping.

The current target is not taken into account in blocks calculations which has an influence on hopping as well.

In order to provide a full protection from hopping, it is necessary to reward only full-value shares. However, this solution makes no sense, as it brings the whole union to the regular solo mining.

Conclusion

When the Bitcoin network's hashrate started increasing, participants entered a technology race. Its results show that miners usually prefer a small but reliable profit. As of autumn 2018, more than 80% of the whole hashrate belongs to major mining pools.

In addition to the mentioned methods, there are options for their development, as well as more complex approaches. The simplest reward distribution schemes have flaws, and the ways to eliminate these disadvantages are described in the next article.

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